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November 2018

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Offshoring -

Offshoring

Contrary to prominent belief, offshoring is not the usually dubious practice of opening a new company or relocating an existing one in a tax haven as an instrument to reduce or even avoid your taxes altogether. Rather, it’s the professional practice of outsourcing certain departments or operations overseas, chiefly by companies in industrialised countries to less-developed or emerging countries. Prime intention being the reduction of the cost of doing business and yes, why not, reduction in taxation footprint.

Prominent among the reasons is:

Lower labour costs

More lenient environmental regulations

Flexible labour regulations

Proximity to raw materials

Access to services

Advantageous tax regimes

Offshoring is nothing new and was one of the factors that considerably contributed to global economic development from the mid-20th century. Companies at that time were focusing offshoring (hence outsourcing) efforts to manufacturing jobs especially in the textile industry and elementary assembly jobs to other countries. By the start of the 21st century however, and as technological innovation, communication advances and educational opportunities increased, developing countries were able to provide a sophisticated labour force. Hence, companies and corporations in the industrialised world, increasingly started to outsource skilled jobs too, not only in the IT industries, but also customer call centres, finance and other mid-level management functions.

Many experts have coined the term ‘’outsourcing’’, when in reality, the practice is actually ‘’offshore- outsourcing’’. According to N. Gregory Mankiw, a Harvard professor, who has also served as chairman of the White House Council of Economic Advisers, ‘’offshore outsourcing is the latest manifestation of the gains from trade that economists have talked about at least since Adam Smith’’. Due to misinformation however, most entrepreneurs in wealthy countries consider outsourcing a disruptive effect on the economy and additionally don’t fully understand the dynamics behind apt outsourced offshoring.

The popular outsourcing centres in China, India, Ireland, Canada and the Baltics is only the tip of the iceberg as offshore-outsourcing hubs in Eastern Europe are nowadays emerging substantially. A combination of low wages, highly educated Eastern-Bloc workforce and low taxes have made countries like Bulgaria, Romania and the Czech Republic very attractive to businesses from the industrialized world.

This region is very comfortable in dealing in both internal (captive) and external (purely outsourced) delivery models and the usual European business barriers that usually hampered progress, such as costs and cultural differences is less of a contributing factor in this region. European companies can additionally take advantage of a new, relatively unheard of economic model known as nearsourcing which by definition is the business process to a nearby country, where both parties benefit from:

Proximity

Time zones

Linguistics and culture

Political or historical links

Greater oversight

Transfer pricing

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It is notable to point out that German software company SAP has taken advantage of low wage, high skill and close proximity with Bulgaria and has forged a nearshoring relationship with the Balkan country. SAP’s example is just a mere taste of nearshoring, because according to the Central-Eastern European Outsourcing Association (CEEOA), published research has conservatively estimated that Eastern Europe has over 95.000 IT specialists, serving 5.000 companies.

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Without doubt, offshore outsourcing and nearshoring is an operational differentiator that is destined to take even more prominence and is a concept that no serious Entrepreneur or board can afford to overlook. If you regard this as a ‘’prospective phenomenon’’ and don’t take advantage of this approach, your competition may just view it as a viable mechanism and sensibly apply it to their own advantage.

Aidelco has Implemented dozens of offshoring-nearshoring plans from start to finish, not only in Bulgaria but throughout Eastern Europe. Aidelco can help you in accessing the application of offshore outsourcing, nearsourcing to your existing business with a viable plan to help you optimise your operation. Contact us to discuss relatively.